U.S. Regulation of Money Services Businesses from the Perspective of Crypto Startups

Under U.S. law, a Money Services Business (“MSB”) is defined by the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury, in accordance with the Bank Secrecy Act (“BSA”) regulations (31 CFR 1010.100(ff)). MSB includes any person offering (1) check cashing; (2) foreign currency exchange services; (3) issuing or selling money orders, travelers’ checks; (4) providing or selling prepaid access; (5) money transmission; or (6) providing U.S. postal services.

MSBs are subject to a range of obligations under 31 CFR 1022. These include registering with FinCEN, implementing anti-money laundering (“AML”) programs, maintaining transaction records, and reporting certain types of transactions, and suspicious transactions that may indicate money laundering, tax evasion, or other criminal activities.

Failure to comply with these obligations may result in both civil and criminal penalties, including  a fine up to $500,000, and imprisonment for up to 20 years under 18 U.S.C § 1956.

Money transmitters in the U.S. are a type of MSBs. According to 18 USC §1960 and 31 U.S.C. §5330, businesses in the U.S. are required to obtain a money transmitter license (“MTL”) when they are engaged in “transferring funds on behalf of the public by any and all means.” (e.g., transmitting or converting money, or receiving money for transmission, including virtual currencies).

Crypto industry is within the scope of MSB regulations as well. In 2011, FinCEN was one of the first U.S. federal agencies to think about cryptocurrency regulation, which culminated in 2013 FinCEN Guidance FIN-2013-G001 (Mar. 18, 2013) on virtual currencies. The guidance sets out three categories of crypto participants: users, exchangers, and administrators. Users use currency to purchase real or virtual goods, and they are not money transmitters. In contrast, an administrator or an exchanger is a money transmitter under FinCEN regulations, unless a limitation to or exemption (the exchange of crypto for goods and services does not fall under the definition of MSB, as there is no exchange for currency / crypto) from the definition applies to the person. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.

An administrator or exchanger that (1) accepts and transmits a convertible virtual currency (i.e., a type of virtual currency that either has an equivalent value as currency, or acts as a substitute for currency, and is therefore a type of “value that substitutes for currency in accordance with FinCEN Guidance FIN-2019-G001 (May 9, 2019)) or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN regulations.

The application of MTL obtaining requirements to crypto startups has been upheld by courts in:

• United States v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014), where the court found that a Bitcoin exchange operating without a money transmission license was in violation of federal law;
• United States v. Harmon, Criminal Case No. 19-cr-395 (BAH) (D.D.C. Apr. 16, 2021), where the operator of a Bitcoin "mixer" service was charged with operating an unlicensed money transmitting business.

Notice that not every crypto startup is a money transmitter. For example, providers of custodial wallets services and exchanges are considered money transmitters as they are engaged in the transfer of virtual currencies. At the same time, providers of non-custodial wallets services generally are not subject to the MSB and MTL regulations as they don’t transmit virtual currencies and only take fees. Crypto gaming industry also may be subject to MSB regulations if certain in-game assets have features of virtual currencies (e.g., can be bought and sold outside the game, have a determinable price, etc.).

It is important to assess whether your crypto startup registered or doing business in the U.S. falls under the definition of the MSB, in which case you must:

• register with FinCEN as MSB using the BSA E-Filing System and renew the registration biannually, maintain an AML program, keep records of certain transactions and report them to FinCEN;
• obtain MTL in every state you are doing business in except Montana.

There is no uniformity among the states when it comes to regulating crypto businesses. For example, under the California money transmitter statute, businesses receiving money or monetary value for transmission within or outside the U.S. must obtain a money transmitter license, whether the transmissions are physically in the state, or with, to or from persons located in California. California’s Money Transmitter Act does not address cryptocurrencies and the state has not provided official guidance on the applicability of its money transmitter statute to cryptocurrencies.

On the other hand, Florida specifically requires individuals engaged in the business of selling virtual currency in that state to obtain a license under the state’s money transmission law. The Florida Office of Financial Regulation cited the Florida Third District Court of Appeals decision in State v. Espinoza, 264 So. 3d 1055 (Fla. 3d DCA 2019). In this case, the Third District Court of Appeals reversed the trial court’s decision and decided that selling bitcoin requires a Florida money services business license. Espinoza was charged with operating an unlicensed money service business by selling bitcoin. The case held that bitcoin is a “payment instrument,” thereby bringing the sale of bitcoin within Florida’s money transmission laws. As a result, persons and businesses engaged in the business of selling cryptocurrency in Florida, including in a noncustodial capacity, must obtain a license under the state’s money transmission law.

New York is ahead of everyone with its Virtual Currency Business Activity License, or BitLicense introduced in 2015. So far, BitLicense is the hardest and most burdensome MTL to get. Requirements include having a security (i.e., surety, bond, etc.) of at least $500,000, undergoing an investigation by the state that checks all aspects of a to-be NY crypto MTL. Also, requirements are not straightforward, since the New York Department of Financial Services reviews each project individually to decide whether it should be allowed to provide crypto services to the NY general public. Currently there are only 33 entities holding a BitLicense.

You can read more about each state’s requirements and fees for obtaining an MTL here.

It is also possible to obtain MTLs in several states with only one application due to the Multistate MSB Licensing Agreement Program (“MMLA”). The MMLA Program can be used by MSBs that apply for more than 5 MTLs during 12 months and under condition that it is allowed under the Nationwide Multistate Licensing System & Registry (“NMLS”). Such multistate MSBs must submit the “Intake Form” to the Washington Department of Financial Institutions. 

The procedure consists of two phases: (1) review conducted by the Washington Department of Financial Institutions, and (2) review of the licensing request by specific states. If the procedure is passed successfully, the applicant will receive an MTL in each state.

You should carefully follow the legal requirements in your area as the responsibility for non-compliance is severe. Failure to register as a cryptocurrency business with FinCEN can result in a civil penalty of $5,000 per transgression and a prison sentence of up to 5 years. In addition, 18 U.S.C. §1960 makes the failure to maintain any required state money transmitter license a federal crime. Finally, case law indicates that the sale of cryptocurrency without a state license could trigger a state criminal prosecution.